AD~lNISTRATIVE PROCEEDINGFILE NO, 3- '2497

UNITED STATES OF AMERICABefore the

SECURITIES AND EXCHANGE COHHISSION

In the Hatter of

PHILIP S, BUDIN & CO" INC.PHILIP S. BUDIN

File No. 8-13488

INITIAL DECISION(Private Proceedings)

February 22, 1974Washington, D.C.

Sidney L. FeilerAdministrative Law Judge

I. THE PROCEEDINGS

These private proceedings were instituted by order of the

Commission pursuant to Sections lS(b) and lSA of the Securities Exchange

Act of 1934, as amended, ("Exchange Act") to determine whether certain

allegations set forth in the order are true and, if so, what, if any,

remedial action is appropriate in the public interest.

The order for the proceedings,as amended, sets forth allegations

by the Division of Enforcement (formerly known as the Division of

Trading and Markets) that during the period from approximately October 1,

1968 through approximately December 20, 1968 Philip S. Budin & Co., Inc.

("Registrant") and Philip S. Budin, at all times here relevant President

of the Registrant, a director, and owner of more than 10% of its shares,

willfully violated and Willfully aided and abetted violations of Sections

5(a) and (c) of the Securities Act of 1933, as amended, ("Securities

Act") in connection with the offer and sale of shares of the common stock

of Memory Magnetics, International ("MMI") (at all relevant times known

as Comstock-Keystone Mining, Co ,, "C-K"). It is also alleged that these

Respondents during the aforementioned period willfully violated and

willfully aided and abetted violations of the anti-fraud provisions of

the Securities Acts (Section 17(a) of the Securities Act and Section 10(b)

of the Exchange Act and Rule 10b-5 thereunder) in connection with the

offer and sale of the aforementioned securities during the period stated

above. It is further alleged that during the relevant period these

Respondents willfully violated and willfully aided and abetted violations

of Section 10(b) of the Exchange Act and Rule lOb-6 thereunder in connec-

tion with the distribution of Comstock-Keystone shares. Additional

allegations in the order are that during the relevant period Registrant

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violated Section 5(a) and (c) of the Securities Act in connection with

the offer and sale of shares of the common stock of Xl Production, Inc.

and that the Registrant and Budin failed reasonably to supervise persons

under their supervision with a view to preventing violations of the

Securities Acts and Rules and Regulations thereunder, such persons1 /

having committed violations of said provisions as alleged in the order.

The Respondents filed answers in which the material allegations of the2 /

order were denied.--

Pursuant to notice a hearing was held in Los Angeles, California,

New York, New York, and Miami, Florida. The parties were represented by

counsel and full opportunity was afforded them to present evidence and

to examine and cross-examine witnesses. Proposed Findings of Fact,

Conclusions of Law, and Supporting Briefs were filed on behalf of the parties.

On the basis of the entire record, including his evaluation of the

testimony of the witnesses, the undersigned makes the following:

II. FINDINGS OF FACT AND LAW

A. The Respondents

The Registrant has been registered with the Commission as a

broker-dealer pursuant to Section l5(b) of the Exchange Act, since

October 6, 1967. During the relevant period the firm was engaged in the

trading of over-the-counter securities. During the last half of 1968

1 / The order also included allegations against Louis Freshman, who wasa trader for the Registrant during the relevant period. The Commission,pursuant to an offer of settlement, has issued its Findings and Orderimposing remedial sanctions upon Freshman (Sec. Exch. Act Rel. No. 9542,March 27, 1972). Because of the nature of the charges and the allegedactivities of the Respondents and their association with Freshman, thisinitial decision will necessarily include discussion of the activitiesof Freshman but solely for the purpose of resolving the issues remainingin this proceeding.

2 / The Respondents stipulated that they made use of the facilities of inter-state commerce and of the mails in connection with the transactions setforth in the order.

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the firm had 30 to 40 employees with 6 to 8 traders. It made a market in

approximately 500 stocks for which it inserted quotations in sheets

published by the National Daily Quotation Service, Inc. The retail

operations of the firm comprised less than 1% of its total business. It

was a member of the National Association of Securities Dealers, Inc.,

a national securities association registered pursuant to Section 15A

of the Exchange Act.

Philip S. Budin, during the relevant period, was the President,

a director, and the owner of at least 50% of the stock of the Registrant.

In addition to his other duties Budin also acted as a trader and in late

1968 he was placing quotations in thequotetionsheets for between 125

and 150 issues a day. Budin had overall supervisory responsibility for

the firm, including direct supervisory responsibility for the trading

and sales activities of the Registrant.

Louis Freshman, during the relevant period, was a trader for the

Registrant having started work there in March 1968. He traded between

75 and 90 different stocks.

B. Activities of the Respondents with Respect to the Stock of Comstock-Keystone

1. History of C-K until June 1968.

C-K, incorporated in 1933, had been a shell corporation with no

assets, employees or business operations for at least 20 years prior to

1968. Since 1948 it had been under the control of a Paul Schwarz who

kept it alive in the hope that it might be of interest to others for

takeover. In the Spring of 1968 Schwarz owned and controlled at least

177,250 shares of the approximately 1,137,000 shares outstanding. He

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and his family had options to purchase 350,000 additional shares.

Schwarz also was a creditor of C-K to the extent of $16,000 to $18,000.

Around April 1968 Angie Anapol and Ben Evans approached Schwarz

concerning a possible takeover of C-K and Smuggler Mining Company,

another company controlled by Schwarz and his family. Eventually an

arrangement was made for the takeover of both C-K and Smuggler by

Anapol and his associates, as reflected in the C-K minutes of April 3,

1968 and in the Smuggler minutes of May 20, 1968. Anapol and his

associates were elected chief officers of C-K.

In addition to the transactions reflected in the minutes, Anapol

and his associate, Evans, asked for some tradeable stock of C-K. Schwarz

sold them 100,000 of purportedly free trading shares. Evans at that

time made a list showing share amounts and certificate numbers and gave

a copy to Schwarz. Schwarz sold an additional 52,000 shares to Anapol

when the latter said he needed more stock for persons he was dealing with3 /

to take over C-K.--

2. Acquisition of Control of Comstock-Keystone by WesleyPowers.

Anthony Doria was a long-time acquaintance of Anapol. Through

Anapol, Doria acquired approximately 104,000 shares of C-K for approxi-

mately l2¢ per share during the months of April and May 1968.

Doria also knew Wesley Powers who owned a California company,

Economy Plating Company, and other companies. In a discussion between

Powers and Doria, Powers told Doria that he had developed a new computer

disc pack and was ready to market it. Doria suggested to Powers that

1-/ Schwarz testified that due to a mistake on his part he actuallydelivered certificates for 68,000 to Anapol instead of 52,000 shareswhich were the subject of the transaction.

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that he "go publid', but Powers told Doria that this would take a

lot of time and would not be of immediate financial help to him.

Doria then suggested C-K and Smuggler as vehicles to accomplish Power's

plan,and put him in touch with Anapol. Powers met with Anapol in May

1968,and on June 7, 1968, at a meeting in Reno, Nevada, an agreement

was reached whereby Powers took over control of C-K and Smuggler.

Under the terms of the agreement, on June 7, 1968, C-K issued

3,515,000 shares of its authorized but unissued shares of stock to Powers,

who in return transferred to C-K 1,975 shares of Economy Plating, repre-

senting an 80% interest in Economy Plating. Powers thereby acquired

approximately a 70% interest in the then outstanding 5,000,000 shares

of C-K. At the June 7 meeting, Anapol and his associates resigned as

officers and directors, Powers was elected president, and he and his

associates became directors and filled the remaining officer positions.

After Powers took over control, C-K undertook to engage in the manu-

facture of computer peripheral equipment and plating. Powers, at all

times thereafter, was the dominant factor in the affairs of C-K, made all

important decisions, and controlled the activities of C-K.

3. Powers'Participation in the Sale of C-K shares.

No registration statement has ever been filed with the Commission

for C-K or Memory Magnetics shares. On June 7, 1968 when Powers took

control of C-K, its shares were being traded on the over-the-counter

at l5¢ per share. By July 15, 1968 the price had risen to $8 per share.

On July 22, 1968 the Commission issued an order suspending over-the-

counter trading in C-K shares stating that its action was based upon

the need for information concerning the financial condition and the

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activities of C-K (Div. Ex. 8(a)). It noted that shares of C-K had

been issued in exchange for shares of Economy Plating and stated that

no certified financial data was available concerning Economy and that

the last annual report filed by C-K showed that its liabilities

exceeded its assets.

In the last week of July 1968, Thomas Matthews, an old friend

of Powers discussed with Powers the latter's financial problems and on

July 31, 1968 Matthews made an unsecured loan to Powers of $100,000.

At that time, Powers voluntarily gave Matthews a certificate for 5,000

shares of C-K. This certificate was one of the certificates that

Schwarz had turned over to the Anapol group.

Matthews testified that a few days prior to August 20, 1968,

Powers told Matthews that C-K needed money very badly, that it could

collapse and that he (Powers) had formulated a plan whereby more money

could be obtained. The essence of the plan was that Matthews would

go with Powers to the Torrance Airport. There he would go to a person

whom Powers would point out, receive a sealed envelope containing

stock certificates, fly with Powers to Las Vegas and then turn the

envelope over to a person at the Las Vegas Airport whom Powers would

identify.

According to Matthews, this plan was carried out. Powers took

Matthews to the Torrance Airport and pointed out a man from whom

Matthews obtained a sealed envelope. The man was Anthony Doria, the

person who had introduced Powers to Anapol. Doria gave Matthews a

sealed envelope and then Matthews and Powers flew in a private airplane

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to Las Vegas.--The shares handed Matthews were shares Doria received

from Anapo1 and, of these, at least 50,000 had been obtained by

Anapol from Schwarz.

At the Las Vegas Airport, Powers pointed out or introduced

Matthews to another man to whom Matthews gave the envelope he had

received from Doria. The man was Edward J. Kiefaber, a partner

in Universal Securities, a broker-dealer firm.

A few days later Matthews received two documents. One, on

Universal stationery, signed by Kiefaber, and dated August 20, 1968

was a receipt for 65,000 C-K shares stated to be deposited for

safe-keeping. The other was an option agreement, dated August 20,

1968 purporting to be between Matthews and Kiefaber giving the

latter a one-year option to purchase the 65,000 shares at $5 a share

for 32,500 and the balance "at 25% below the going market price

at the time of execution." Matthews testified he turned these docu-

ments over to Powers.

Thereafter, beginning in October and continuing through December

1968, Matthews received four checks from Kiefaber totalling $179,000

reflecting proceeds from the exercise of the option. Matthews testified

that he turned these checks over to Powers and received notes from him

for the amounts, although he did not ask for the notes. Shares from

the block Matthews turned over to Kiefaber ultimately went from the

latter to the Registrant.

4 / Doria corroborated Matthews' version and testified that at Powers'request he agreed to turn over 75,000 shares of C-K to Matthewsand that he placed them in a brown env~lope and handed them toMatthews at the Torrance Airport.

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Counsel for the Respondents contends that in testimony Matthews

gave in the course of an investigation more than two years prior to

his testimony in this proceeding his version of what took place was5 /

diametrically opposed to his later testimony.--

In the earlier version, Matthews testified that he had told

Powers that he wanted to buy all the C-K shares he could, they discussed

a price of 10¢ a share, Matthews got stock from Doria, and flew to

Las Vegas with Powers where they met Kiefaber. Matthews agreed to

turn over the shares to Kiefaber and left it to the latter to figure

out what the shares were worth. Thereafter, according to Matthews in

his earlier version, he deposited checks he received from Kiefaber into

his own bank account and loaned these sums to Powers or his corporations

and endorsed checks over directly. He received notes for the loans and

intended to collect on them.

Counsel for the Respondents contends that the investigative

testimony given by Matthews is diametrically opposed to that which

he gave at the hearing and his testimony at the hearing should be dis-

regarded in its entirety and not be used to make adverse findings against

the Respondents.

Matthews testified that prior to his appearance at the investi-

gationPowers told him to say that the funds he received from Kiefaber

and turned over to Powers were loans, that the stock he received

from Doria was his and that he sold it through Kiefaber (Tr. 526, 528-530).

The undersigned agrees with the contention made as to Matthews' testimony.

5 / Resps. Ex. 6. Certain portions of this transcript were offeredon behalf of the Respondents during cross-examination of Matthewsand received for the limited purpose of testing his credibility.The Division offered additional pages from that transcript, pp. 93-110, as amplifying or explaining prior answers. Decision was reservedon this offer. They are received in evidence for the limited purposestated in the record.

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The two versions given by Matthews are completely at variance. The

undersigned has decided to accept only that portion of Matthews'

testimony which finds corroboration in other independent testimony

or from other portions of the record.

Doria's t.e-st Lmorry and both versions of Ma t thews'testimony are

in agreement that Doria had no negotiations with Matthews concerning

the sale of his stock~nor did he receive any sums from Matthews.

Rather~Doria was very definite that he agreed with Powers to turn over

his stock to the latter and looked to him for eventual compensation

for those shares. The arrangement to turn the envelope containing

the shares to Matthews at the Torrance Airport was part of the scheme

concocted by Powers.

Matthews did not know Kiefaber until Powers arranged their

meeting at the Las Vegas Airport. Of the two versions which Matthews

gave as to what transpired there: (1) that he merely handed a sealed

envelope to Kiefaber or (2) that he gave the envelope to Kiefaber and

also told him that he owned the stock and Kiefaber should give him

whatever he could get for it~ the former version is the more logical

and conforms to the fact that the stock purchase agreement which

Kiefaber sent Matthews had a definite purchase price formula and

ultimately Kiefaber remitted $179~OOO~ a not insignificant sum~

one which he undoubtedly would not have sent if the price had been

left to his discretion.

The undersigned~ therefore~ concludes that, to the extent

indicated, the testimony of Matthews at the he3ring finds support

in other evidence and is accepted as to the parts played by Powers,

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Matthews and Kiefaber in the transfer of 65,0~0 shares of C-K

from Doria (who had obtained them from a person then in control

of C-K) to Kiefaber. Budin & Co. ultimately obtained a substantial

portion of these shares from Kiefaber. Doria, at Powers request,

placed his shares under the control of Powers. Powers made the

arrangements with Kiefaber, both as to the delivery and price of

the shares. Matthews followed Powers' instructions in the transfer6 /

plan and did not share in the proceeds.--

4. Disposition of C-K Shares by Kiefaber

B. Promotional Activities by Powers and Kiefaber

On September 30, 1968, the Commission issued a release announcing

the termination of the C-K trading suspension as of October 7, 1968.

It pointed out that until recently C-K had been a dormant "shelV'

corporation, the company had filed unaudited, incomplete financial

datB, that an audit then in progress would quite likely show that the

company was insolvent. Broker-dealers were cautioned that before

effecting transactions in C-K for their customers, they should make

the information contained in the release known to their customers and

6 / The one factor that does not fitis that Matthews received notes,the money turned over to Powers.payment on these notes and therepayment.

into this view of the evidencenot requested he claimed, forMatthews never received any

is no evidence he pressed for

The evidence demonstrates that Powers was a devoteeof deviousschemes and devices, including masterminding the transfer ofsealed envelopes between strangers and surreptitious meetingsat airports. (He used the sealed envelope device in transferring15,000 C-K shares he obtained from Kiefaber to an investor. Thesewere part of the shares Matthews had turned over to Kiefaber. Powersreceived the $15,000 obtained for these shares). Probably the best ofhis schemes is his disappearance and unavailability for testimony atthe hearing. What his motivation was in giving the notes is not clear,but the evidence establishes that there was no loan transaction inMatthews' transfer of the Kiefaber checks to Powers.

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avoid violations of the anti-fraud provisions of the Federal Securitie~

Laws (Div. Ex. (8b)).

There is evidence that Powers and Kiefaber took action designed

to blunt the impact of the Commission's cautionary admonition to brokers

and investors and to organize an effective stock-selling scheme.

Emmett Paddon, a Detroit resident, had been a friend of

Powers for a number of years and had had some business dealings with

him. In the early part of 1968 Powers met with Paddon at the Detroit

Airport and sought to have him make a personal investment in C-K or to

raise a substantial investment fund with others. Nothing came of this

meeting, according to Paddon, although Powers continued to call him

from time to time with optomistic reports on the C-K stock.

Later in the year, in November, when Paddon said he was interested

in the stock and wanted to know what Powers had in mind, the latter

said he would "turn [him] over to Ed Kiefabe~' (Tr. 692). Powers gave

Paddon contradictory answers as to Kiefaber's association with him,

but did assure Paddon that, "Kiefaber knows everything I do. Whatever

Kiefaber tells you is the same as my telling you."(Tr. 693)

Shortly afterwards, Paddon started receiving calls from

Kiefaber. Kiefaber told him that he had made arrangements with stock brokers

whereby a position would be taken in a stock and the price would be

moved up by pre-arrangement. He suggested that Paddon buy C-K

stock and, according to Paddon, told him to do business with Philip

Budin of New York (Tr. 697, 717-718).

Paddon bought no C-K stock at that time, but at the end of

November, 1968 or the beginning of December, when he picked up Kiefaber

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at the Detroit Airport, he placed an order for some of the stock

at the latter's urging. Kiefaber had come to Detroit to meet brokers7/and to talk to them about C-K.-- During the course of Kiefaber's 3-day

visit, Paddon introduced him to 3 brokers whom he knew personally and

accompanied him on visits Kiefaber made to approximately 9 other

brokerage offices.

Paddon testified that Kiefaber made a uniform presentation to

brokers stating that he had a network of brokers, who would work with

him to increase the price of a stock he was interested in, offered

brokers options in C-K stock and spoke of increases in price and

earnings it would attain.

Kiefaber also suggested to Paddon that he carryon after him

and make similar presentations to other brokers. At Paddon's suggestion,

he made a tape of a model presentation and left it with Paddon (Div. Ex. 43).

The tape which was transcribed into the record herein (pp. 723-731)

started as a presentation of the merits of C-K, mentioned a recent con-

tract for $20,000,000, other contracts, and estimated gross sales of

$50 to 60,000,000, with earning of $2 to $3 per share. The statement

was made that "we are conservatively looking at a $70, $80 stock at the

end of '69" (Tr. 726, the stock was then selling at about $21). Mention

also was made of a network that would act in concert and move the stock

to any level it wanted. Paddon testified that he heard Kiefaber use

a presentation to brokers in his presence similar to that on the tape

and adding the inducement of stock options.

7 / Powers, according to Paddon, knew that Kiefaber was coming to Detroitand had told Paddon that he would take care of any expenses incidentalto showing him around (Tr. 700).

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According to Paddon, Kiefaber made numerous telephone calls

to brokers and several of these were ~o Philip Budin. He did not recall

the content of these conversations (Tr. 780-781).

Paddon's testimony was corroborated by that of John T.

DeHayes, a broker to whom Kiefaber made a sales presentation on C-K after

being introduced by Paddon. DeHayes stated that Kiefaber offered him

a stock option for 300 shares at several points below the market, told

him that the stock should sell at about $70 in a year, that he was going

to make calls on a number of brokerage houses, after which the stock

would rise. DeHayes also identified a pamphlet which Kiefaber showed

him -- an Economic Report to C-K by a purported "Financial Relations and

Underwriting" firm forecasting sales of $30 million in 1969 and $59 million in

1970 and net income of $4 million in 1969 and $10 million in 1970

(Div. Ex. 31).

The undersigned credits Paddon's testimony and concludes that

the evidence establishes that Powers and Kiefaber were engaged in an

extensive effort to interest brokers in different cities to join in

a group effort to manipulate the price of C-K stock and push the price8 /

up to the mutual benefit of all participants in the scheme.--

8 / Objection Was made to this evidence on hearsay and relevancy grounds.The Commission has stated, in Alessandrini & Co., Inc., Sec. Ex. ActReI. No. 10466 p. 9, (Oct. 31, 1973) "It is well established that thetechnical hearsay rules are not applicable to administrative proceedingswhich favor liberality in the admission of evidence, and that all evi-dence which 'can conceivably throw any light upon the controversy' shouldnormally be admitted in such proceedings," citing Samuel H. Moss, Inc. v.F.T.C. 148 F. 2d 378, 380 (C.A. 2, 1945), Cert. den 326 U.S. 734, (1945).

The evidence also is relevant on the question of the connection betweenPowers and Kiefaber and the part they played in the distribution of stockthat ultimately wound up at Budin and Co~ When there is participation in adistribution of unregistered stock, those who play some part do not necessar-ily know everyone who plays some part and evidence of the entire course ofevents is necessary to understand exactly what took place (see S.E.C. v.North American Research and Development Corp., 424 F. 2d 63, 1970).

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That Powers and Kiefaber were successful in their scheme is

demonstrated by the fact that on October 7, 1968, when the Commission

permitted over-the-counter trading in C-K to resume, it opened at

about $10 a share. It rose steadily thereafter until it traded at

approximately $20 by December 17, 1968. On that date the Commission

again suspended trading in C-K, stating that the suspension was ordered

"by reason of the dissemination by the company of financial and other

information about the company, its operations, financial condition

and future prospects which appears to be false and misleading." Also

an audit report had not been filed, as expected (Div. Ex. 8 (c».

b. Participation of Respondents in the Purchase and Saleof C-K Shares.

At all times here relevant Louis Freshman was a trader employed9 /

by the Registrant. His wife owned a 50 percent interest in the firm.--

Freshman initiated trading in C-K by the Registrant

According to Freshman, he first heard of C-K when, on a Western

trip, he stopped off in Las Vegas and noticed the offices of Universal

Securities. He had done some business with this firm and went in for

a visit. While waiting to see Kiefaber, who was associated

with Universal, he heard persons asking for quotations on C-K. Freshman

then asked Kiefaber about the stock. The latter told him it was a stock

he had an interest in and that he himself had bought an "awful lot of the

stock on the market." (Tr. 910). Additional information that he obtained

from Kiefaber at that time, Freshman testified, was that a Budin corres-

pondent was handling the stock, that the company made peripheral drives,

was producing material cheaper than any competitor, and had been suspended9 / It has been previously noted that Freshman, while named in the order

for these proceedings, is no longer a party (see fn. 1).

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by the Commission, but was "reinstated," and that he, had bought

"qui te a bit of the stock" for himself. Whi le Freshman had no present

recollection of it, he did testify in the course of an investigation

conducted while he was still employed by the Registrant, that Kiefaber

suggested that C-K would be a good trading number for him lito go into10/

the sheets with." (Div. Ex. 47(8), p. 21)-.- Freshman did not receive

any further information about C-K from Kiefaber or any details on the

suspension. He recalled that Kiefaber had mentioned acquiring about

25 or 30,000 shares, on the open market, but made no effort later to check

on the sources from which he had acquired the stock.

Continuing his testimony, Freshman stated that about a

week later, after talking to a trader employed by the Budin California

correspondent who assured him it was "a good trading number," he decided

to trade C-K. He telephoned an assistant and told him to enter

quotations in the pink sheets. He made no effort to learn anything

further about the issue.

Shortly thereafter, Freshman received an inquiry from the

correspondent, P.N. McIntyre, asking whether he had stock available

3,000 shares Was the amount sought. Freshman attempted to reach Kiefaber,

at Universal Securities, but was told that he was no longer associated

with that firm. He did reach Kiefaber and did purchase 3,000 C-K shares

from him.

10/ Respondents have objected to the use of any portions of Freshman'sinvestigative transcript as against them. Freshman's testimony wasgiven while he was in the employ of the Registrant and dealt withmatters within the scope of his employment and peculiarly withinhis knowledge. The objections are not valid (HcCormick, "Evidence",p , 518).

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Records in evidence show that the init~al appearance of the

Registrant in the pink sheets was on October 22, 1968 (Div. Ex. 33).

The transaction with Kiefaber took place on the preceeding day, October 21

(Div. Ex. 35). Thereafter Budin & Co. continued to quote C-K in the pink

sheets through December 17, 1968 with most of the quotations inserted by

Freshman. Freshman also effected the firm transactions in the stock.

He had no discussions about the merits of C-K either when he purchased

or sold the stock at retail or in dealings with other brokers (Tr. 939-940).

He stated that he had no discussion about the stock with Budin and since

the firm was trading about 500 stocks a day~ C-K did not loom large in

the firm's affairs. Budin would receive a printout showing each trader's

position at the end of the prior day and whether he had made or lost money

(Tr. 943). Freshman also stated he unilaterally determined to quote C-K

and that Budin who was with him during part of the aforementioned western

trip knew of his decision (Tr. 958).

Freshman conceded that Kiefaber told him initially that

he had 25 or 30,000 shares of C-K. He denied that he made any agreement11/

to sell them or that Kiefaber said he wanted to sell them.--He main-

tained that each transaction he had with Kiefaber was an individual trans-

action as a result of hard bargaining. Kiefaber would call several times

a day for quotations, he stated, but came to the office once or twice.

Freshman stated that Kiefaber originally had told him he had bought

his shares on the open market and that checking was done with the transfer

agent on shares purchased from Kiefaber. He denied that he received

any money or other inducements to make a market in C-K.

11/ In his investigative testimony he testified that Kiefaber had saidhe wanted to sell his shares (Tr. 968-970).

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Registrant's principal transactions in C-K commenced on October 21,

1968 and ended on December 17, 1968, the date of the second suspension

of trading (Div. Ex. 35). It purchased 35,625 shares at a cost of

$506,762.50 and sold 35,705 shares at total price of $524,923.75.

(Div. Ex. 35). There was only one agency transaction of 4,000 shares

at a price of $30,000 (Div. Ex. 36).

Transactions with Kiefaber by the Registrant in C-K stock began

on October 21, 1968 and ended on December 10, 1968. All transactions were

purchases by Registrant from Kiefaber. Registrant purchased 23,800 shares

from Kiefaber and also purchased for retail customers 4,000 shares from

him upon an agency basis. These shares were all subsequently sold by or

through Registrant to other broker-dealers.

Kiefaber severed his connection with Universal Securities prior

to his first C-K transaction with the Registrant, and Freshman, who

negotiated the trade,knew this. Kiefaber's new account card at Registrant,

dated October 23, 1968, lists his occupation as "insurance agene'. All

certificates he tendered Registrant with the exception of those for 300

shares were in the name of UnicD and were shares which Kiefaber had

received from Matthews. Almost all C-K shares delivered by Kiefaber were

in street name.

Registrant's practice on receipt of stock from Kiefaber was to

telephone the C-K transfer agent to find out if the certificates were

"free and clear' or had any restrictions against them (Tr. 809). Four

such calls were made and payment then made to Kiefaber. Registrant remitted

$311,700 to Kiefaber. At least $179,000 was sent by Kiefaber to Matthews,

who turned this money over to Powers (Tr. 205 210).-

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Contentions of the parties; Conclusions

The Division contends that the Respondents willfully violated

the registration provisions of the Securities Act in the offer and sale12/

of C-K stock.-- It is conceded that no registration statement was ever

filed with respect to any C-K shares and that the Registrant used the

facilities of interstate commerce and of the mails in effecting trans-

actions in C-K.

The Division contends that there was a violation of Section 5

by the Respondents, that the burden of proving an exemption from

Section 5 is on the Respondents, and that no exemption was established.

It is also urged that no adequate inquiry was made to determine whether

Registrant was participating in a distribution of C-K, as defined in the

Securities Act.

The Respondents contend that Registrant's transactions in C-K were

exempt transactions and that after trading resumed in C-K on October 7,

1968 after the suspension by the Commission other broker-dealers both in

the East and the West quoted C-K, although the extent of their trans-

actions in it is not available. It also contends that Matthews' testimony,

which has been dealt with in some detail, should be disregarded and that

Registrant should be held to have engaged in exempt dealer transactions

as defined in Section 4(3) of the Securities Act.

12/ Section 5 of the Securities Act provides, in pertinent part,that it shall be unlawful to make use of the instruments oftransportation or communication in interstate commerce or of themails to offer to sell or to sell a security unless a registrationstatement is in effect as to it.

-19-

In any event, it is asserted, any violation of Section 5 was

not willful, the Respondents did no~ know that any C-K shares Registrant sold

were part of a distribution, there were no circumstances surrounding

the transactions between Registrant and Kiefaber which should have alerted

them ro make any inquiry, and that any searching inquiry, even if under-

taken, would have unearthed nothing.

It is undisputed that Registrant offered to sell, sold, and

delivered C-K stock when no registration statement was in effect as to

those securities. Therefore, Registrant's sales activity was violative

of Section 5 of the Securities Act unless some exemption from the

registration provisions can be established. The burden of proof is11/

on the party seeking to establish the availability of an exemption.

The exemption relied on must be strictly construed14/

claiming its benefit, as public

against the person12/

policy strongly supports registration.

Certain transactions are exempt from the provisions of Section 5

of the Securities Act pursuant to the provisions of Section 4 of that

Act. However, no exemption is available under this section to an issuer

or underwriter (Sec. 4(1)). The term "underwriter" is defined in Section

2(11) of the Securities Act as:

" any person who has purchased from an issuer with aview to, or offers or sells for an issuer in connection with,the distribution of any security, or participates or has adirect or indirect participation in any such undertaking,or participates or has a participation in the direct orindirect underwriting of any such undertaking;. "

13/ SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953); Penna1una & Co.,Inc. v. SEC, 410 F. 2d 861 (C.A. 9, 1969), cert. den. 396 U.S. 1007(1970); SEC v. Culpepper, 270 F. 2d 241, 246 (C.A. 2, 1959).

14/ U.S. v. Custer Channel Wing Corp., 376 F. 2d 675, 678, den.389 U.S. 850 (1967); SEC v. Sunbeam Mines, 93 F. 2d 699 (C.A. 9, 1938).

15/ Garfield v. Strain, 320 F. 2d 116, 119 (C.A. 10, 1963).

•

~

20-

With respect to an "issuer", the section states:

" . As used in this paragraph the term "issuer" shall in-clude, in addition to an issuer, any person directly or in-directly controlling or controlled by the issuer, or anyperson under direct or indirect common control with theissuer. . . ."

"Dt strLbut Ion' has been held to comprise II the entire process

by which in the course of a public offering the block of securities is

dispersed and ultimately comes to rest in the hands of the investing16/public.lI

Applying these principles to the facts of the instant case,

it is evident that, at all times here relevant, Powers was an "issuer'

within the meaning of the Securities Act as a person in control of C-K

both by reason of his position as operating head of C-K and his stock

ownership.

The evidence further establishes that Doria, who had obtained

his shares through a person then in control of C-K, placed those shares

at the disposition of Powers. It makes no difference on this point,

that the shares were actually handed by Doria to a nominee of Powers

(Matthews) rather than to Powers, himself. At that point the shares

were under the control of Powers, an issuer.17/

Kiefaber had a close relationship with Powers. The plan to move

the Doria shares to Kiefaber was devised by Powers with the connivance

of Kiefaber. At that point, Kiefaber fell within the definition of

16/ Oklahoma Texas Trust, 2 S.E.C. 764,769 (1932), affld 100 F. 2d888 (C.A. 10, 1939); Ira Haupt & Company, 23 S.E.C. 589,596-599, (1946);Lewisohn Copper Corp.; 38 S.E.C. 226, 234-235 (1958).

17/ In addition to evidence previously detailed, there is evidence thatKiefaber had free use of the C-K office in Las Vegas (Tr. 274-279).

-

-

-

21-

issuer since he was working with Powers in a joint scheme for the

disposition of C-K shares and the manipulation of the market. He

also was an "underwriter" as that term is defined in the Securities

Act since he was playing a vital part in the distribution of the

Doria shares, among others, to the public. ~lost of the shares Kiefaber

turned over to Registrant were part of the Doria block and went from the

Registrant into the general stream of distribution to the investing

public. Thus Registrant played a key role in the distribution process

as defined in Section 2(11) of the Securities Act.

Of the 35,625 C-K shares purchased by Registrant as principal,18/

30,500 (86%) came directly or indirectly from Kiefaber (Div. Ex. 35).

The remainder of 5,125 shares came from other brokers. The record of the19/purchases from Kiefaber is as follows.--

TrllJe dete1968

Oct. 21

Nov. 7

" 14

18

" 18

" 26

" 27

" 29

" 29

Dec. 6

" 10

Number Shares Cost or Price Total Firm Budin Cost Budin PinkPurch<Jsed Per Share Cost Position Per Share Sheet Bid

3,000 s 8 $24,000 3000L

2,000 6~ 13,000 1900L 6~ 6

1,000 7~ 7,500 1000L 7~ 6

2,300 lOt 23,575 1555S lOt 7~

4,000 12~ 50,000 2945L l2~ 9~

1,000 13 3/4 13,750 3270S 13 3/4 13~

4,000 14 3/4 59,000 3545S 14 3/4 13~

1,000 19 19,000 27455 19 16

2,000 17 34,000 745S 17 16

2,000 14 3/4 29,500 5105L 14 3/4 l6

1,500 14 3/4 22.125 1405L 14 3/4

18/ 6,700 shares which came from Kiefaber were sold to retail customerswho then resold the shares to Registran~ (Div. Ex. 41).

19/ This table does not include an additional transaction of 4,000 sharesbought on November 29, but cancelled as of December 6.

-

-22-

There was in addition a single agency transaction on November 14

when Registrant purchased 4,000 shares at $7~ per share and divided

them among 3 accounts, a Budin profit-sharing account, David Budin,

Budin's brother, and Phyllis Freshman (Freshman's wife)(Div. Ex. 36).

The Commission has summarized applicable principles and key20/

decisions in a release published in 1962.-- In it, it cautioned broker-

dealers of steps they must take to avoid participation in an illegal

stock distribution. In particular, it stated:

" ... a dealer who offers to sell, or is asked to sell asubstantial amount of securities must take whatever stepsare necessary to be sure that this is a transaction not in-volving an issuer, person in a control relationship withan issuer or an underwriter. For this purpose, it is notsufficient for him merely to accept 'self-serving statementsof his sellers and their counsel without reasonably exploringthe possibility of contrary facts' .

The amount of inquiry called for necessarily varieswith the circumstances of particular cases. A dealer who isoffered a modest amount of a widely traded security by aresponsible customer, whose lack of relationship to the issueris well known to him, may ordinarily proceed with con-siderable confidence. On the other hand, when a dealer isoffered a substantial block of a little-known security,either by persons who appear reluctant to disclose exactlywhere the securities came from, or where the surroundingcircumstances raise a question as to whether or not theostensible sellers may be merely intermediaries for con-trolling persons or statutory underwriters, then searchinginquiry is called for.

The problem becomes particularly acute where substantialamounts of a previously little known security appear in thetrading markets within a fairly short period of time andwithout the benefit of registration under the SecuritiesAct of 1933. In such situations, it must be assumed thatthese securities emanate from the issuer or from personscontrolling the issuer, unless some other source is knownand the fact that the certificates may be registered in thenames of various individuals could merely indicate that thoseresponsible for the distribution are attempting to covertheir tracks." (footnote omitted)

20/ Sec. Act ReI. No. 4445 (Feb. 2, 1962).

-23-

Freshman denied that he ever received all the Kiefaber shares

purchased in one lot from the latter or had any agreement to market

those shares. The record of the various purchase transactions would

seem to bear him out. Respondents argue, in effect, that Registrant

was never offered a large block of C-K stock by Kiefaber, but only

made purchases from him in separate, individual trades, each of which

was not large.

However, these trades cannot be evaluated in isolation. It

is evident that Kiefaber was by far the key supplier of C-K to the

Registrant. Kiefaber had the status of a retail customer, having

severed his connection with Universal Securities shortly after

Freshman met him,but he was no ordinary retail custome~ and Freshman

did not treat him as such. Freshman knew of Kiefaber's experience as

a professional trader. He had learned from Kiefaber that he had bought

25 to 30,000 shares. While he denied in his testimony at the hearing

that Kiefaber told him he wanted to dispose of all those shares, he

did state that Kiefaber would call him 2 or 3 times a day to find

out Freshman's quotations on C-K and offer to sell him some shares.

(Div. Ex. 47(a) p. 43-44). The purchases Freshman made from Kiefaber

enabled the former to maintain a market in C-K and to complete his

other transactions in that stock. The transactions with Kiefaber

occurred so frequently and in soshortaperiod that they can only be

viewed in their totality and not in isolation. As such, they were

the prime source of supply of C-K shares for Registrant and totalled a21/

substantial amount.-- The undersigned concludes that Registrant violated21/ The Commission has held that when shares emanate from an issuer, the

fact that a relatively small amount of shares are involved does not makethe sales any the less a public distribution requiring registration underthe Securities Act and sales by a person who obtained his shares from theissuer cannot be likened to ordinary trading activity (Merrill Lynch, Pierce,Fenner & Smith, Inc., Sec. Exch. Act ReI. No. 9959, (Jan. 24, 1973)).

-24-

the registration provisions of the Securities Act in the offer and

sale of C-K stock,by acting as underwriter for C-K stock.

Budin had knowledge of the Registrant's participation in

C-K from the beginning. He was with Freshman during part of the

latter's western trip when Freshman first met Kiefaber. Freshman

told Budin there that he intended to trade C-K. Budin bought 2,000

shares of C-K for his wife's account at the Registrant. Others

who would have undoubtedly looked to him for guidance also bought

C-K. His brother, David, bought 3,000 shares in two transactions (Tr. 944).

A close friend, Melvin Haber, bought 1,000 shares in two transactions. A

Budin Profit Sharing Plan, in which Budin would have had a voice, bought

1,000 shares. All these purchases were liquidated within a 3-week period

at substantial profits (Div. Ex. 37).

Budin occasionally took telephone calls from Kiefaber when the

latter wanted quot~tions on C-K and would give him that information

(Tr. 1118-1119). He knew of the course of the trading by Freshman in

C-K and participated in it. Under these circumstances, it is concluded

that he aided and abetted the violations by the Registrant of Section 522/of the Securities Act-.-

22/ Respondents are responsible for the violations committed by theirstaff under the doctrine of respondeat superior (Armstrong, Jones & Co.,Sec. Exch. Act ReI. No. 8420 (Oct. 3, 1968», aff'd 421 F. 2d 359, 362(C.A. 6, 1970), cert den. 398 U.S. 958 (1970).

-25-

Respondents contend that any violations of Section 5 of the

Securities Act, even if committed by them, were net willful. It is

well established that a finding of willfulness under the Exchange Act does

not require an intent to violate, but merely an intent to do the act which23/

constitutes a violation.-- The Commission has held that brokers have a

responsibility to be aware of the requirements necessary to establish

an exemption from the registration requirements of the Securities Act

and be reasonably certain that such an exemption is available before

engaging in transactions which raise a question of compliance with those24/requirements.--

There was ample evidence to alert the Respondents to the need

for further investigation before continuing their trading with Kiefaber.

Kiefaber initially suggested that Freshman trade C-K. Kiefaber was in

touch with Freshman several times a day checking Registrant's C-K quotations

and negotiating trades. All his transactions were sales -- it was evident

he was unloading a blockof stock. Freshman's trades with Kiefaber, be-

ginning in November 1968, were frequent and substantial (see table p. 21).

Freshman was using Kiefaberas his major source of supply of C-K stock.

23/ Tager v. SEC, 344 F. 2d 5,8 (2nd Cir. 1965), affirming, SidneyTager, Sec. Exch. Act ReI. No. 7368 (July 14, 1964); Accord,~Marks, 25 S.E.C. 208, 220 (1947); George W. Chilian, 37 S.E.C.384 (1956); E.W. Hughes & Company, 27 S.E.C. 629 (1948); HughesV. SEC, 174 F. 2d 969 (C.A.D.C. 1949); Shuck & Co., 38 S.E.C. 69(1957); Carl M. Loeb, Rhoades & Co., 38 S.E.C. 843 (1959); IraHaupt & Company, 23 S.E.C. 589, 606 (1946).

24/ See, e.g., Strathmore Securities, Inc., Securities Exchange ActRelease No. 8207, p. 8 (December 13, 1967); Mark E. O'Leary,Securities Exchange Act Release No. 8361, p. 7, n. 13 (July 25, 1968).As two Courts have stated, "Brokers and salesmen are under a duty toinvestigate and their violation of that duty brings them within theterm willful." Hanly v. S.E.C., 415 F. 2d 589,595-6 (C.A. 2, 1969);Quinn and Company, Inc. v. S.E.C., 452 F. 2d 943,947, (C.A. 10, 1971),cert den., 406 U.S. 957 (May 30, 1972).

-26-

Yet beyond checking the certificates received from Kiefaber with the

C-K transfer agent, Respondents did nothing. This was insufficient under25/

the circumstances.--

Respondents assert that any investigation by them would not have26/

revealed anything-.- Actually, if Respondents had reviewed the Commission's

suspension order, they would have noted that C-K was a newly reactivated shell27/

and it was probably insolvent. The precipitous price rise of its stock there-

after should have given Respondents reason for further checking on Kiefaber

and his sustained interest in the stock. The fact that other brokers were

quoting the stock does not excuse Respondent~ failure here because the

actual trading by those brokers has not been est~b1ished nor the extent of their

knowledge of C-K, Kiefaber and Powers. Another item that should have given

Respondents some pause was that Kiefaber came to them to trade while the

center of C-K trading activity, according to Freshman, was on the West Coast.

Freshman made it abundantly clear in his testimony that he was

only interested in what the telephone told him, as he put it. The evidence

establishes that this approach was adopted and acquiesced in by the

Respondents. The undersigned concludes that their violations were willful.

25/ Inquiry from the transfer agent was insufficient. Although the trans-fer agent could furnish information on the state of the transfer recordshe was not an arbiter of the validity of transactions (Stead v. S.E.C.,444 F. 2d 713, 716 (C.A. la, 1971)).

26/ The Commission has held that it need not speculate what reasonable inquirywould have disclosed where no such inquiry has been made. Herbert L. Wittow,Sec. Ex. Act Re1. 9303 p. 7, n. 20 (1971); Strathmore Securities Inc.,43 S.E.C. 575,584 (1967) aff'd 407 F. 2d 722 (C.A.D.C. 1969); L.A. FrancesLtd., Sec. Ex. Act Rel. 9220 p. 5 (1971).

27/ "Where the sale of securities of a shell corporation is involved, it isincumbent on a broker-dealer to exercise special care so as to be rea-sonably assured that no violation of the securities laws is involved"(Bohn-Wil1iams Securities Corp., Sec. Exch. Act Re1. No. 9327, p. 4,1971).

-27-

5. Violations of the Anti-Fraud Provisions of the Securities Acts

It is alleged in the order for these proceedings that the

Respondents, singly and in concert, willfully violated the anti-fraud28/

provisions of the Securities Acts in a number of respects.--

a. Arrangements with Kiefaber

It is alleged in the order for these proceedings that the

Respondents entered into an agreement under which they agreed to and

did purchase unregistered securities of C-K for Registrant's account

and for the accounts of Budin, Freshman and members of their families.

It is evident that Kiefaber and Freshman did find it mutually advantageous

to deal with one another on a regular basis. Freshman decided to trade

C-K at Kiefaber's suggestion and after some discussion with a trader from

Registrant's California correspondent Freshman almost immediately completed

a 3,000 share C-K trade with Kiefaber. The record of Kiefaber's trans-

actions with the Registrant has been previously set forth (supra, p.21).

It shows very clearly that Freshman used Kiefaber as his principal source

of supply of C-K stock and Kiefaber used Registrant as a principal outlet

for his C-K shares. There are other indications that the relationship

between Freshman and Kiefaber was not a casual one. At one point,

Kiefaber told Paddon to deal with Budin & Co. While Kiefaber had the

status of a retail customer, Freshman dealt with him substantially as a

28/ Section 17(a) of the Securities Act and Section lOeb) of the ExchangeAct and Rule 10b-5 thereunder. The composite effect of these pro-visions, as applicable here, is to make unlawful the use of the mailsor interstate facilities in connection with the offer or sale of anysecurity by means of a device or scheme to defraud or untrue or mis-leading statements of a material fact, or any act, practice, or courseof conduct which operates or would operate as a fraud or deceit upona customer or by means of any other manipulative or fraudulent device.

-28-

trader. Kiefaber was in daily communication w~th Freshmen seeking

C-K quotations and negotiating C-K sales. He was not charged any

commission on an agency sale. Budin & Co. was on the East Coast

whereas according to the evidence presented the center of interest in

C-K was on the West Coast and it appeared strange for Kiefaber to deal

with a broker 3000 miles away from the center of interest.

All the above items are indicia of more than a routine trading

relationship between Registrant and Kiefaber. However they fall short

of establishing a definite agreement between those parties for the

purchase of unregistered C-K shares by Registrant from Kiefaber. Budin

& Co. made its first C-K trade with Kiefaber on October 21. Its next

transaction with him was on November 7, two weeks later. This is

hardly indicative of a firm agreement between Budin & Co. and Kiefaber.

The ten transactions between them were negotiated over a two-month

period at different prices. The evidence does not establish anything

more concrete than that Registrant and Kiefaber developed a close

relationship whereby Kiefaber became the major supplier of C-K stock to

Registrant and Kiefaber, thereby, was able to dispose of a substantial

amount of unregistered C-K stock. These shares went into Registrant's

account as principal, primarily, and Budin, Freshman and members of their

families acquired shares directly or indirectly which they sold at sub-

stantial profits within a few weeks of their purchases.

29-

b. Quotation Activity

It is alleged that quotations for C-K by Registrant were entered

in the National Daily Quotation Service (Eastern Edition, commonly

referred to as the "pink sheets") and thereby giving the appearance of

making a bona-fide two-sided market when, in fact, a bona-fide two-

sided market was not being made in that said quotations were being made

below the prevailing prices at which said securities were being quoted;

said activities being carried out in order to facilitate a distribution

of said shares and for the purpose of attracting buying interest and of

discouraging other selling interest in C-K.

The Division contends that Budin & Co. had an agreement with

Kiefaber to sell his stock; to effectuate this agreement, Budin & Co.

inserted unrealistically low quotes in the sheets seeking only to

attract buying interest in order to distribute Kiefaber's stock and to

deter other selling interest. Ultimately, Registrant acquired 86% of

its total C-K shares from Kiefaber. It is argued that Registrant consistently

traded at prices much different from its quotations over a two month period.

The trading ban on C-K was lifted on October 7, 1968 and trading

in C-K commenced immediately and continued until December 17, 1968 when

a trading suspension was again reimposed. During this period 14 broker-

dealers appeared in the pink sheets, some more frequently than others.

Budin & Co. first appeared in the pink sheets on October 22, and was listed

a total of 30 times until December 13, including dates when its name

appeared with no quotations (Div. Ex. 33). During the same period,

9 broker-dealers appeared in the Western Edition of the National Daily

Quotation Service ("White Sheets"), 3 of whom also appeared in the

-

-30-

pink sheets (Div. Ex. 34). Budin & Co. did not appear in the white

sheets. As previously noted, the greatest trading interest was on the

West Coast.

The issue raised here is really a two-part issue, although there

is an inter-connection. The first part relates to the quotations in-

serted by the Registrant in the pink sheets. The Division contends

these were unrealistic8lly low, inserted to deter selling interest and

to attract buying interest for the purpose of facilitating the dis-

tribution of Kiefaber's SLack. Respondents argue that this contention

has not been established, pointing out that of the 25 quotations inserted

by Budin & Co. for C-K stock it had the lowest bid of all broker-dealers

on 11 days, but only on 3 of these days was it the lowest of all broker-

dealers (Div. Ex. 33). On two of the days Registrant's bid was lowest by

a point and on the other day it was lowest by a point. The rest of the

days there were a substantial number of brokers who submitted the same

or lower bids.

On the ask side, other brokers had lower bids than Registrant

on 17 of the 24 days Registrant inserted bids in the pink sheets. On

3 of the remaining 7 days, other brokers had the same ask price.

A large number of brokers placed quotations in the sheets for

C-K in the October--December 1968 period. Under ordinary conditions

it would have been impossible for Budin & Co. or any other broker to have

been able to exercise control in the market unless he was the leader of

a conspiracy, joined in by most of the other brokers, or if he controlled

~

-31-the supply of the stock. No evidence has been presented as to the

existence of any conspiracy nor is there any proof as to the actual

activity of other brokernin C-K. While Budin & Co. had quotations on

the low side on a number of days, it cannot be said that the record

establishes that it had unrealistically low quotations during the29/

period.

The other part of the issue raised is the relationship between

the quotations Registrant was inserting in the pink sheets and the

prices at which it was concluding contemporaneous trades.

The Division points out that on 8 or the 25 dates that Budin &Co. placed quotes in the pink sheets, the firm executed no trades at their

quoted prices, rather all their trades were above the quotations, including

trades with Kiefaber (Div. Ex. 35).

Of Budin & Co.ls 39 buy transactions, 27 (69%) were over its bid

price, 3 (8%) were below it, two (5%) were at the bid price and for 7 (18%)

there were no comparison bid prices. Of the 27 that were above the bid

price, 12 (44%) were 2 points or more over it and 21 (78%) were a point

or more over it.

On the sell side, of the 71 transactions involved, 34 (48%) were

above the asked price, 16 (22%) were below it, 9 (13%) were at it, and

for 12 (17%) there was no comparison asked price. Of the 34 trades above

the asked price, 11 (32%) were 2 or more points over it, and 22 (65%) were

a point or more over the asked price. The Respondents contend that the

29/ It is deemed unnecessary to review the white sheet quotations on thisquestion (Div. Ex. 34).

-32-

Budin & Co. quotations in the pink sheets merely showed its range of

prices and that it was not bound to stay within those limits.

It has been pointed out in the Special Study of the Securities

Markets that, "the ~heets' published by the National Quotation Bureau, Inc .

. . . are the primary medium for the dissemination of wholesale or 'inside'

quotations among professionals. They are of crucial importance to the

over-the-c~unter markets .... Professionals use the sheets to find and

communicate buying and selling interests in securities and to judge30/

activity." These quotations are affected with a public interest (Exchange

Act, Sec. 2) and have been held to constitute proof of prevailing market31/

prices.

A comparison of Registrant's actual trades, especially its purchases,

demonstrates that the prices paid were consistently over its contemporaneous

bid price in the pink sheets. The differences in many instances were

substantial. Several trades with Kiefaber had a spread of 3 points (see table

p. 21). There were a few 4 points gaps. (Div. Ex. 35). There was a fairly

consistent pattern of these substantial spreads from mid-November 1968 until

the end of Registrant's trading in C-K stock.

The result of these practices was that the pink sheet quotations

of Budin & Co. did not reflect the actual market it was making in C-K

stock. The divergencies were not fractional, but substantial. They

continued over a long period and while quotations were changed the

practice of inserting lower than actual market quotes continued. These

quotations could not then be regarded as indicative of Registrant's current

market in C-K stock. To that extent they were a misrepresentation

30/ Report of Special Study of Securities Market, Part 2, p. 585.

31/ Merritt, Vickers Inc. v. SEC 353 F. 2d 293, 296 <C.A. 2, 1965).

-33-

of Registrant's position, were a misuse of the quotation system,

and by these acts, the Respondents willfully violated the anti-

fraud provisions of the Securities Acts.

-34-

c. Activities while effecting a distribution of C-Kshares.

It is also alleged that the Respondents effected a distribution

of C-K shares, and in connection therewith failed to make any disclosure

of the source of said stock, the interests of Registrant, Budin,

Freshman and members of their families therein, the nature of the market

being made by Registrant, and the facts and circumstances under which

said securities had been acquired.

It is also alleged that while engaged in the aforesaid distribution,

Respondents bid for and purchased C-K securities for accounts in which

they had a beneficial interest and induced and attempted to induce other

persons to purchase said securities. This conduct is alleged to be

violative of the anti-fraud provisions of the Securities Acts and of Section32/

lOeb) of the Exchange Act and Rule lOb-6 thereunder.

It has been found that the Respondents participated in a dis-

tribution of shares purchased from Kiefaber, the latter having acquired

the shares and acted for an issuer. It is undenied that while trans-

actions with Kiefaber were taking place, the Registrant was bidding for

and purchasing C-K stock for its account and that the facilities of

interstate commerce were being used in the process.

32/ Regulation IOb-6, promulgated pursuant to Section lOeb) of the ExchangeAct provides, in pertinent part, "It shall constitute a 'manipulativeor deceptive device or contrivance' as used in Section lOeb) of theAct for any person, ... (3) who is a broker, dealer, or other personwho has agreed to participate or is participating in such a distribution,directly or indirectly, by the use of any means or instrumentality ofinterstate commerce, or of the mails .... to bid for or purchase forany account in which he has a beneficial interest, any security whichis the subject of such distribution . . . or to attempt to induce anyperson to purchase such security . . . until after he has completedhis participation in such distribution."

•

-35-

Respondents contend that they were not engaged in a distribution,

an issue which the undersigned has considered in connection with the Section

5 violation. It is further urged that cases relied on by the Division

are innpposite to the evidence adduced in the instant case, maintaining

that those cases are factually disting~ishable from the instant case, especia]l~

on the extent of Budin & Co.'s knowledge with respect to C-K shares as

compared to that found in the cited cases. Ie is also asserted that the

number of Kiefaber's C-K shares traded by Budin & Co. was relatively small

(27,800) in proportion to the total number of shares outstanding (5,000,000);

no special commission was paid to Budin & Co. on its sales of Comstock

shares: there is no evidence that Budin & Co. unduly concentrated pushing

C-K shares over any other security, and there was no agreement between

Budin & Co. and any alleged selling group.

The factors urged by the Respondents are not determinative of the

issue here. There is no requirement that a respondent trade a specific

number or percentage of shares in order to become subject to the provisions33/

of Section lOeb) and Rule IOb-6. If a respondent participates in a

distribution, he cannot bid for or purchase such securities until he has

completed his participation in the distribution. This mixed activity did

occur here. The undersigned therefore concludes that the Respondents

violated and aided and abetted violations of Section lOeb) of the Exchange

Act and Rule 10b-6 thereunder, and that these violatlons were willful.

It is undisputed that in the course of the trading by Registrant

in C-K stock no disclosure was made of the source from which a substantial

majority of Registrant's C-K stock was obtained, the facts and circumstances

33/ See, Kennedy, Cabot & Co., Inc., Sec. Exch. Act Rel.No. 8817, p. 3 (1970).

-36-

under which those shares had been acquired, and the nature of the market

being made by Registrant. This information was of vital importance

to those with whom Budin & Co. was dealing and the failure to furnish

it was violative of the anti-fraud provisions of the Securities Acts,

chargeable to the Respondents as willful violations.

6. Failure of Supervision

It is alleged in the order for these proceedings that during

the relevant period Registrant and Budin failed reasonably to supervise

persons under their supervision with a view to preventing violations

of the Securities Acts and rules and regulations thereunder, such persons

having committed violations of said provisions as alleged in the order.

Budin, as chief officer of the Registrant, was in charge of all

operations of the Registrant, including trading activity. He also was

taking a full-time part in Registrant's trading activities. During the

relevant period the firm was making a market in approximately 500 stocks

and employing 6 to 8 traders. Budin, himself, handled 125 to 150 issues.

A broker-dealer has a general obligation to properly supervise34/

employees to avoid violations of the Securities Acts. This obligation

also is imposed on supervisory personnel within the area of their

supervision. Supervisors must be alert to avoid violations of the

registration provisions of the Securities Act and the anti-fraud provisions35/

of the Securities Acts.

34/ L.A. Frances, Sec. Exch. Act ReI No. 9220, p. 5-6 (1971); SecurityPlanners Associates, Sec. Exch. Act ReI. No. 9421, p.5 (1971).

35/ L.A. Frances, supra; D.H. Blair & Co., Sec. Exch. Act ReI. No. 8888,p. 7-8, 10 (1970); Dunhil1 Securities Corp., Sec. Exch. Act ReI. No.9066, p. 4 (1971); Stone Summers & Company, Sec. Exch. Act ReI. No.9839, p. 6 (1972).

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Budin was the sole supervisory otficer of the Registrant.

Admittedly he had no time during regular trading hours to perform

any supervisory duties. Budin testified that he commenced work two

hours before the market opened and would continue working late into

the evening and would review operations during that time and check

transaction sheets. He further testified that before a stock could

be traded he had to give his permission and the trader involved would

have to advise Budin why he wanted to trade the stock, its price

spread, the number of shares outstanding and whether other dealers were

making a market in the stock. Budin further stated that he obtained

this information on C-K directly from Freshman or a trader for P.N. McIntyre.

He also knew Kiefaber and his connection with another brokerage firm

with whom Budin & Co. had traded. All certificates turned in by

Kiefaber were checked with the transfer agent, Budin pointed out.

Budin's testimony is at variance with that of Freshman as to

general supervisory procedures. According to Freshman, he made his own

decision on whether to trade a stock and would only refrain from doing

so if another trader were already trading the stock. (Freshman was

trading 75 to 80 stocks at the time). His only obligation, Freshman

stated, was to stay within the funds allotted him for trading purposes.

The undersigned credits Freshman's testimony. In any event,

even under the standards Budin set forth, it is clear that he was

interested in trading information on a company and not the underlying information

which would assist him in evaluating whether any Securities Acts violations

would be involved in dealing with certain customers.

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There is no evidence that Freshman had. other than a free

hand in dealing in C-K. At no time did Budin review his trades

with him or question why a majority of the purchases of C-K were made with

Kiefaber. None of the past history of C-K was reviewed. Under all the

circumstances, the undersigned concludes that Budin failed reasonably to

supervise as alleged in the order. Registrant is also r~sponsible for this

violation.

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C. Activities of the Respondents with Respect to the Stock of XI Productions, Inc.

It is alleged in the order that the Registrant violated Section 5

of the Securities Act in the offer and sale of approximately 20,000 unregis-

tered shares of XI Productions, Inc. The failure to supervise allegation in

the order also applies to the sales activities in this stock by Registrant

and its employees.

Approximately in March 1968 Mickey Rooney conceived the idea of

forming a new corporation for the purpose of obtaining public financing

for his ideas concerning stage, screen and television productions. Through

a Robert Bryson, contact was made with Kachina Uranium Corp. On July 11, 1968,

after negotiations had taken place, a final agreement was signed merging

Barbroo Enterprises (which held Rooney's contract) with Kachina. By the terms

of the merger agreement, Kachina, which at that time had approximately

1,000,000 shares outstanding, issued 4,600,000 shares of investment stock to

Barbroo for the assets of Barbroo which included Rooney's service contract,

various interests in residuals, Rooney's television shows and other literary

properties.

Of the 4,600,000 shares issued by Kachina to Barbroo, 1,000,000

shares were transferred to a group including Robert Bryson for their efforts

in locating and negotiating for Kachina. These included two certificates,

issued on July 12, 1968, for 210,000 shares each and bore restrictive legends.

On August 12, 1968, at a meeting of stockholders, the name of Kachina was

changed to XI Productions, Inc. The two certificates, previously mentioned,

were reissued as XI Productions certificates in Bryson's name on August 27,

1968. These certificates were reissued as one certificate in the name of

Unico on September 16, 1968. Ultimately, on November 29, 1968, this certificate,

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broken down into smaller denomiations still in Vnico's name, were

transferred into certificates in the name of Edward Kiefaber.

The records of Budin & Co. show that on December 6, 1968, Budin

& Co. purchased 20,000 shares of XI Productions from Kiefaber for $20,000.

These shares which originated from shares issued by XI Productions to Bryson

were resold to others. No registration statement was filed with the

Commission or was in effect with respect to these shares of XI Productions

and the mails were used in connection with the above transactions.

Budin & Co. had been trading the stock of XI Productions since

November 15, 1968 and continued to do so until May 1969. Trading was in

substantial amounts, but no individual transaction approached 20,000 shares;

the highest buy transaction being 5,000 shares and the highest sell transaction

being 8,000 shares.

Bryson was part of the control group that took over control of

Kochina. The subsequent changes in stock certificates issued to it, both

in name and in denominations, all of which took place in a short time, were

obviously steps taken to facilitate a distribution in violation of Section

5 of the Securities Act. Here, as in the case of C-K stock, Kiefaber

cooperated with persons in the control group in helping to dispose of

unregistered stock.

The Registrant, outside of a routine call to the transfer agent,

made no searching inquiry into the circumstances under which Kiefaber obtained

possession of the block of XI Productions stock. The prime interest of

the Budin trader in this stock was to see whether he could dispose of the

stock on the market. This was done even before the transaction with Kiefaber

was technically completed. The XI Productions transaction came at the end

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of the series of transactions Registrant had with Kiefaber in C-K stock.

This was an additional basis for the exercise of caution in dealing with

Kiefaber, but it did not have that effect. It is concluded that no basis for

exemption for the offer and sale of this unregistered stock has been established

and it fufurther found that Registrant willfully violated Section S of the

Securities Act in the offer and sale of XI Productions, Inc. stock obtained

from Kiefaber.

Budin knew of the negotiations between his trader and Kiefaber and

had knowledge of the plan of this trader to sell Kiefaber's shares into the

market before the actual purchase was made. He made no effort to intervene

or insist that some further inquiries be made, other than a call to the

transfer agent, before the transaction was closed. It is concluded that

Budin failed reasonably to supervise to prevent this violation. Registrant

was also responsible for this violation.

Ill. CONCLUDING FINDINGS, PUBLIC INTEREST

The Commission, pursuant to the provisions of Section lS(b)(S)

of the Exchange Act, so far as it is material herein, is required to

censure, suspend for a period not exceeding twelve months or to

revoke the registration of any broker or dealer if it finds that such

action is in the public interest and that such broker or dealer, subsequent

to becoming such, has willfully violated any provision of the Exchange

Act, the Securities Act, or any rule or regulation thereunder, or has

failed reasonably to supervise, with a view to preventing violations of

such statutes, rules, and regulations, another person who commits such a

violation, if such other person is subject to his supervision. It also

may, pursuant to the provisions of Section lS(b)(7) of the Exchange Act,

-42-

censure, bar, or suspend for a period not exce~ding twelve months any

person from being associated with a broker or dealer if it finds that such

sanction is in the public interest and that such person has willfully

violated any provisions of the Exchange Act, the Securities Act, or any

rule or regulation thereunder. Furthermore, pursuant to Section lSA of

the Exchange Act it may expel or suspend a member of a registered securities

association who has violated any provision of the Securities Acts or rules

and regulations thereunder.

It has been found that Philip S. Budin & Co., Inc., the Registrant,

and Philip S. Budin, its president and the person in charge of its operations,

willfullyvioiated the registration provisions of the Securities Act, the

anti-fraud provisions of the Securities Acts, and failed reasonably to

supervise persons subject to their supervision with a view to preventing

their participation in the violations found. Theseprovisions are key provisions

of the Securities Acts designed to protect investors and the public interest

in the integrity of the securities markets. The Division urges that severe

sanctions should be imposed on the Respondents.

The Respondents have been involved in prior administrative and

Court proceedings. The Commission, on October 31, 1973, revoked the

registration of the Registrant and barred Budin from association with

any broker-dealer with the provision that after four months he could apply

to the Commission for permission to become so associated in a non-supervisory36/

capacity, subject to adequate supervision.-- The decision was based on

findings that during the period December 1967 to June 1968, the Respondents

here violated the anti-fraud provisions of the Securities Acts by participating

in or aiding and abetting in the execution of a scheme to manipulate

36/ Alessandrini & Co., Inc., et al., Sec. Exch. Act ReI. No. 10466. Thisdecision is now on appeal.

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the market in and establish an artifici8~ market price for a stock

so that it could be pledged as security for bank loans.

On July 13, 1973, the NASD, in a proceeding involving these

Respondents, issued its Decision and Order of Acceptance of Offer of

Settlement. The basis for the complaint against the Respondents was violation

of net capital rules in 1969, 1970, and 1971 plus the filing with the

Commission on or about March 20, 1971 of a computation of net capital and

aggregate indebtedness which was inaccurate and misleading. The Registrant

was expelled from membership in the NASD. Budin was suspended from

association with any member in the capacity of a registered representative

for six months (until 2/26/74), suspended as a principal from association

with any member in a supervisory or managerial capacity for one year (until

8/27/74), and was suspended from association with any member in the capacity

of a financial principal for five years (until 8/27/78).

On June 7, 1971, a receiver was appointed for Budin & Co. (see

Litigation ReI. No. 5041 (June 11, 1971)). A preliminary injunction had

previously been issued against the Respondents here for violation of the

net capital rule.

Since the registration of the Registrant as a broker-dealer has

been revoked and it has been barred from membership in the NASD no order

from the undersigned with respect to Philip S. Budin & Co.~ Inc. by the

undersigned is necessary. However, the findings of its further violations

are noted for the record should there be an effort to have it return to37/the securities business.--

37/ Benjamin Werner, Sec. Exch. Act ReI. No. 9579 (April 24, 1972).

-44-

Budin's violations were serious. Prior violations by him

buttress the conclusion that substantial sanctions are warranted. He

has demonstrated an inability to properly exercise supervisory authority

and it will be ordered that he be barred from acting in such a capacity.

However, while there may be some doubt as to permitting him to continue

in the securities business in any capacity, the undersigned has concluded

that his violations are attributable primarily to his failure to exercise

proper managerial and supervisory control of his brokerage business and

that after a period of time he should be permitted to apply to the Commission for

permission to be associated with a broker-dealer in a non-supervisory capacity.Accordingly,

IT IS ORDERED that Philip S. Budin is barred from association

with any broker-dealer, provided that after six months he may apply to

the Commission for permission to become so associated in a non-supervisory38/

capacity, subject to adequate supervision.

Pursuant to Rule l7(b) of the Commission's Rules of Practice

a party may file a petition for Commission review of this initial

decision within fifteen days after service thereof on him. This initial

decision pursuant to Rule l7(f) sholl become the final decision of the

Commission as to each party unless he files a petition for review

pursuant to Rule l7(b) or the Commission, pursuant to Rule 17(c),

determines on its on its own initiative to review this initial decision as to

38/ This four months period shall be in addition to the period specifiedin the prior order of the Commission (Sec. Exch. Act ReI. No. 10466,October 31, 1973).

-45-

him. If a party timely files a petition to review or the Commission

takes action to review as to a party, this initial decision shall not39/

become final as to that party.--

._-' v, /' I. -1/ , /-f '-i (

Washington, D.C.February 22, 1974

39/ All contentions and proposed findings and conclusions havebeen carefully considered. This initial decision incorporatesthose which have been accepted and found necessary for incorpora-tion therein.

'" _ ' _